The Bureau of Labor Statistics estimates that over the next decade the labor market will continue to age, with the greatest growth coming from workers aged 55 and over. Among those aged 65 to 74, 32% expect to still be working in 2030, compared with 27% in 2020 and 19% in 2000. According to a Joint Economic Committee report, while workers over 55 make up just 35% of the population, they contribute an estimated 40% of the national economic output.
In a recent study that looked at factors behind the decision to extend work beyond normal retirement age or return to the workplace after retiring, the majority of older Americans say they continue to work because they either can or want to. However, when asked about the “most important” reason they were still working, 26% cited the need to continue working for financial reasons, compared to 13% who say they want to have more money in retirement or that working gives them a sense of purpose. Delving further into participants’ financial motivations, 92% of respondents indicated they needed or wanted more money for retirement, which included 89% of previously retired workers and 94% of those working past the traditional retirement age. In addition, 60% say they have less than $500,000 in savings, including all investments, savings accounts, pension plan/defined benefit plans, and retirement plans.
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How Americans define their “retirement” years has changed dramatically in recent decades. Due to longer average lifespans and continued advances in healthcare, many workers reaching retirement age today can expect to live well into their 90s or beyond. That means many people may live in retirement for as long or longer than they spent working. While supporting your lifestyle in retirement for that length of time requires significant financial resources, money is not the only reason people are choosing to prolong work. A growing body of evidence points to the physical and mental stimulation and social benefits that work can provide in helping to keep our brains sharp as we age, while also providing a greater sense of purpose and meaning. In fact, one study that focused on retirees rejoining the workforce, cited inflation, boredom and loneliness among the reasons they returned to work post-retirement (62% of respondents were retired for an average of six years). In this study:
- 52% said they were bored
- 43% blamed inflation
- 43% felt lonely
Whether you’re thinking about extending or returning to work for personal or financial reasons, take time to consider how earned income may impact other aspects of your finances, such as taxes, Social Security, healthcare and other benefits. Below are five things you need to know to make work in retirement work for you.
1. Wage income may be subject to the Social Security earnings test
When you claim Social Security benefits before reaching full retirement age (FRA) and continue working and earning above a certain threshold, you are subject to the retirement earnings test. The earnings test reduces Social Security benefits before you reach FRA, and then increases benefits for the remainder of your life once you reach your FRA. The annual exempt amount of earned income in 2023 is $21,240 for people who will not reach their FRA this year. For people attaining their FRA in 2023, the annual exempt amount is $56,520. (This higher exempt amount applies only to earnings made in months prior to the month of FRA attainment.) The Social Security Administration withholds $1 in benefits for every $2 of earnings in excess of $21,240 and $1 in benefits for every $3 of earnings in excess of $56,520. Earnings in or after the month you reach your FRA do not count toward the test.
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It’s important to note that any benefits withheld while you continue to work are not lost. They are added to your monthly benefit once you reach FRA. However, earnings that were previously withheld are not returned in a lump sum. Instead, Social Security resets your monthly benefit and returns the previously withheld earnings over time. In addition, you won’t see the increase in your benefit until the month of January, following the year you reach your FRA. For example, if you reach your FRA in June 2023, you will have to wait until January 2024 to begin receiving your higher benefit amount.
2. Paid work can trigger taxes on Social Security
Earned income from a job could also result in a portion of your Social Security benefits being taxed. Federal taxes on benefits apply when combined or provisional income (defined as your modified adjusted gross income plus half of your annual Social Security benefit) reaches $25,000 for individuals and $32,000 for married couples filing jointly. However, you will never pay taxes on more than 85% of your Social Security income. Keep in mind that income brackets will vary by filing status.
Here’s how it works for individuals:
- If you file your income tax return as an individual with a total income that’s less than $25,000, you won’t have to pay taxes on your Social Security benefits.
- Single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits.
- If your combined income is more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.
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For married couples filing a joint return:
- You will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000.
- If your combined income is more than $44,000, you can expect to pay taxes on up to 85% of your Social Security payments.
Keep in mind that state taxes on Social Security benefits, where applicable, are determined by the individual states.
3. You could pay more for Medicare
If income from a job pushes you into a higher tax bracket, that could trigger additional costs for Medicare. That’s because higher earners pay a premium surcharge for Medicare Part B outpatient coverage and Part D prescription drug coverage. Medicare premiums are based on your modified adjusted gross income, or MAGI. That’s your total adjusted gross income plus tax-exempt interest. The higher premiums kick in for individuals with modified adjusted gross income above $97,000 and married couples filing jointly with income over $194,000.
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If you plan to work after turning age 65, be sure to ask the employer that provides your health insurance if you need to sign up for Medicare Part A and Part B when you turn 65. If you don’t sign up for Part A and Part B, your job-based insurance might not cover the costs for services you receive. If you do get Medicare and keep your job-based insurance, Medicare pays for services first, and your job-based insurance pays second.
4. You may be able to delay RMDs
The SECURE 2.0 Act of 2022 raised the age that you must begin taking required minimum distributions (RMDs) to age 73, beginning in 2023. RMDs are the minimum amounts you must withdraw from your retirement accounts each year. However, account owners in a workplace retirement plan, such as a 401(k) or profit-sharing plan, can delay taking their RMDs until the year they retire, unless they’re a 5% owner of the business sponsoring the plan. If you don’t need the RMDs to pay for current living expenses, delaying them may allow your money to continue working for you longer and help manage taxes while you’re working.
5. Don’t forget about work-related costs
While more people than ever before have the option to work remotely, there are still costs associated with equipment, supplies, internet, phone access, and other expenses that may not be reimbursed by your employer. If you’re self-employed, you can deduct most home office expenses when filing your tax return. If you’re working outside of your home, be sure to budget for expenses like transportation, parking, clothing and meals, which can add up quickly.
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Whether you’re currently working in your 60’s or beyond or are thinking about going back to work on a full or part-time basis, consider working with an independent wealth advisor to put a comprehensive plan in place to help you meet all of your lifestyle goals. Your advisor will help you identify, fund and prioritize your goals, and educate you on the opportunities and challenges that working in retirement can present, so you can find your freedom on your terms.
If you’re concerned about how long your money may last in retirement, you’re not alone. Running out of money is the #1 fear people have about retirement. Download our step-by-step guide to help ensure your assets last a lifetime: 3 Methods to Not Run Out of Money.
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